UK: Circumventing The Veil: M v M And Yuri Barkov And Ors

There have been a number of cases this year considering how, and in what circumstances the assets of a company owned by one spouse may be recovered for transfer to the other spouse in the context of ancillary relief proceedings.

The most important of these was the Supreme Court decision in Prest v Petrodel given in June this year. In that case, the Supreme Court confirmed the decision of the Court of Appeal that there is no separate jurisdiction available under section 24 of the Matrimonial Causes Act (MCA) to pierce the corporate veil of a company to access its assets for the benefit of a spouse in ancillary relief proceedings. Rather the corporate veil may only be pierced in cases where a person seeks to evade or frustrate the enforcement of an existing legal obligation, liability or restriction by interposing a company under his control.

However, the Supreme Court found that, in the circumstances of the case in Prest, the properties held by the companies were beneficially owned by the controller of the companies, the husband. As such, the court was able to order their transfer to the wife.

The judge at first instance in DR v GR (decided in May before the Prest decision was handed down), took a different approach, which we review in our article looking at the decision ( click here). Most recently, there has been another decision in the Family Division in M v M and Yuri Barkov and Ors. Unlike the decision in DR v GR, M v M was decided in the light of the Supreme Court's decision in Prest.

M v M bore a number of similarities to Prest in that, in both cases, the husband had failed to disclose his assets as he should have done as part of the ancillary relief proceedings and, in fact, had done everything he could to ensure that those assets were unavailable for transfer to his former spouse. In M v M, it appears that the husband had gone so far as to forge his wife's signature on a share transfer form in order to transfer her half share in a property owning company in the UK (which included a number of residential properties including the matrimonial home) to an offshore company, and subsequently, together with his own half share, to his son by a previous marriage, Yuri Barkov.

The husband in M v M took virtually no part in the proceedings, in fact he was in contempt of court a number of times for failing to do so, and there was very little evidence as to his intentions in relation to the property-owning companies, the assets of which (a number of English properties), were being sought by the wife. The husband had, however, filed an affidavit in October 2010, in which he said in relation to these properties: "There are properties in England which, in effect, I own".

Whilst arguments were put forward in support of the husband, that it was not intended that the property-owning companies would purchase the relevant properties as trustee for the benefit of the husband, the court found that the evidence pointed otherwise. A belated argument that the husband had structured the properties as he had for tax reasons was dismissed by the court, because there was no evidence that this was the case and because the husband did not appear to have much or any interest in either the avoidance, or the payment, of tax.

Having considered the Supreme Court judgment in Prest, the judge in M v M found that the proper approach in law included the following points:

• Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue.
• The court must search for evidence of the subjective intention of the transferor or evidence of actual intention.
• In determining the intention of the parties, the court may, where appropriate, draw adverse inferences against the parties, either in respect of their failure to give or call evidence to rebut the presumption, or by their failure to make proper disclosure within the proceedings.
• Only in the absence of evidence of intention will the law of presumption apply, which presumption will be easily rebutted by evidence of the transferor's intention to make an outright transfer.
• In the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company.

On the facts as they appeared in M v M, including the behaviour of the husband and the companies in question, and direct evidence from the husband in his affidavit of October 2010, the judge determined that he was the beneficial owner of the underlying properties held by the companies. She found that the properties in question were held for the husband on both resulting and constructive trusts. She ordered that the English properties should be transferred to the wife in addition to a lump sum of £38 million, resulting in a total award to the wife of over £53 million with additional payments in favour of the two children of the marriage. Unfortunately, the judge suspected that "very substantial costs of enforcement" would be likely to eat into that award.

Comment

Following as it does the Supreme Court's decision in Prest, this case confirms that whilst the option to pierce the corporate veil of a company in order to access assets for the benefit of a spouse in an ancillary relief case may have been closed by Prest, the courts will not be slow to infer beneficial ownership of company assets where the facts make it appropriate for them to do so. Cases where spouses are less than frank in their disclosure of their assets, as was the case in both Prest and M v M, will be prime contenders for such orders being made. In the unfortunate event of divorce, therefore, both these cases illustrate the importance of full and frank disclosure to the court.

M v M also reinforces the message that wealthy individuals should ensure that they undertake careful wealth structuring, bearing in mind the potential risks of a future divorce. Assets held through companies which are intended to be held by those companies beneficially should be treated accordingly and it should be clearly evident that the individual spouse is not the beneficial owner. On a general note, pre- and post-nuptial agreements are and will continue to be an important aspect of wealth planning, particularly in relation to non-matrimonial assets, where they exist.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.